Eurozone braced for Quantitative Easing as crisis intensifies

Desperate times call for desperate measures. So it is that after years of crisis, and further months of prevaricating, it seems that quantitative easing (QE) will soon be implemented across the Eurozone. However, the contradictions that have prevented such a programme of QE in Europe up until now have not gone away, and the fault lines along which the Eurozone will crack are already apparent and clear.

Having avoided a catastrophic and chaotic breakup of the Eurozone in the immediate wake of the 2008 financial crisis, European leaders now find their economies stuck in a quagmire of low or zero growth, persistently high unemployment, and deflating prices. Whilst an imminent implosion may have been averted, all the signs now indicate that chronic decline and slow rot has set in, and Europe faces decades in the doldrums of economic stagnation.

The chronic sickness of European capitalism

Of particular concern is the emergence of deflation, with prices now falling on average in the Euro economies due to the recent reduction in global oil prices. Whilst this may benefit some consumers, with lower fuel and energy costs, for national leaders, deflation poses a difficult dilemma. On the one hand, with deflation setting in, the value of government debts increases in real terms, making them more difficult to repay at a time when countries such as Greece, Spain, and Italy are already struggling to reduce their debt-to-GDP ratios.

On the other hand, the falling oil price is, in reality, only the final straw. Inflation in Europe was already at near-zero levels, indicating a downward pressure on prices due to over-capacity and a lack of demand, which are themselves a reflection of the economic slump and the continued presence of the colossal overproduction on a world scale. Indeed, the declining price of oil is also itself a reflection of the crisis of overproduction, with global demand for energy falling as the world economy runs out of steam – in particular the recent slowdown in China. As Nouriel Roubini, Professor of Economics at New York University, commented in the Guardian recently:

“The global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms. Unfortunately, only one of its four engines is functioning properly: the Anglosphere (the United States and its close cousin, the United Kingdom).

“The second engine – the Eurozone – has now stalled after an anaemic post-2008 restart. Indeed, Europe is one shock away from outright deflation and another bout of recession. Likewise, the third engine, Japan, is running out of fuel after a year of fiscal and monetary stimulus. And emerging markets (the fourth engine) are slowing sharply as decade-long global tailwinds – rapid Chinese growth, zero policy rates and quantitative easing by the US Federal Reserve, and a commodity super-cycle – become headwinds.

“So the question is whether and for how long the global economy can remain aloft on a single engine.”

Political leaders and their economic advisors, however, have run out of options. Traditional monetary methods have already been tried – and have failed. Interest rates are at rock bottom and can go no lower. Meanwhile, there is no room for Keynesian (demand-side) measures: governments have no money to spend and national debts are already sky high. In short, there are no more weapons in the arsenal; hence the reluctant acceptance by economic representatives to implement quantitative easing across Europe.

Having thrown everything but the kitchen sink at the problem, these learned ladies and gentlemen are now placing all their faith in QE, which they hope will be able to conjure up the required rabbit from the hat. It is one thing, however, to enact such a policy in a planned and controlled way; but it is an entirely different issue to implement this programme in a desperate panic, like sailors attempting to stop their ship sinking by throwing water over the edges with buckets whilst torrents continue to flood in through leaks in hull.

Wolfgang Münchau, writing in the Financial Times (19th January 2015), sums up the situation succinctly:

“Something is happening that was not supposed to have ever happened. It is a big step for the ECB [European Central Bank], given the ideological corner it started from some 16 years ago. But it is also a marker of how desperate things have become. This is not going to be the pre-emptive version of QE, but the post-traumatic one. Inflation expectations cut loose from the target some time ago. Headline inflation is negative. The Eurozone economy is sick.”

The role of QE

In “normal” times, the supply of money – in particular, of credit from banks – is a response to the general level of activity in the economy. When business investment and/or household consumption is growing, demand for money – in the form of loans – will grow. In this way, the money supply, although not directly attached to any commodity (e.g. gold) or economic indicator, is at least anchored in economic reality.

The novelty of QE is that governments now, through their central banks, are trying to increase economic activity – e.g. investment and consumption – by directly intervening in the money supply. Typically, central banks would alter the demand for credit by raising and lowering interest rates: when interest rates are low, the cost of borrowing is low and the idea of taking out a loan in order to invest becomes more attractive. Now, however, interest rates are almost zero, and yet business investment remains stagnant.

Rather than waiting for banks to create loans in response to a demand for them from businesses and households, therefore, or directly stimulating economic activity through government expenditure (i.e. Keynesian measures), central banks are now themselves becoming active agents in the market by creating money and purchasing economic assets from banks – particularly government bonds (i.e. national debts).

The hope is that by purchasing such assets, governments can encourage banks to buy up other assets, such as corporate debts, which in turn will lower the cost of borrowing for businesses and stimulate investment. Such increased economic activity, in turn, should help to lift prices and avert depression-induced deflation.

Outside of Europe, the political and economic representatives of the advanced capitalist countries have already embraced QE: in the USA, having begun in late 2008, quantitative easing was at one point running at a rate of $85 billion per month, with the US Federal Reserve estimate to have now accumulated around $4.5 trillion in asset on its balance sheet; in the UK, the Bank of England has amassed a total of approximately £375bn in assets through QE; whilst in October 2014 the Bank of Japan announced plans to expand its QE programme to an eye-watering rate of ¥80 trillion (around £447bn) per year. To put this in context, the annual GDPs of the USA, UK, and Japan are approximately $17 trillion, £1.6 trillion, and ¥480 trillion. The scale of QE is, quite simply, enormous.

The jury is still out on the success of such QE programmes. For starters, it seems that the primary result has been to enrich the banks, which have used QE money to shore up their reserves, whilst continuing to lend out to households at the same time as become. The bankers make a profit and yet investment remains subdued. Meanwhile, although the US and UK economies may be seeing economic growth currently, there are fears that QE money has inflated asset prices across the board, leaking out of the countries where it was initiated and helping to create bubbles around the world.

The devil is in the detail

Up until now, the European Central Bank (ECB) has resisted implementing any Eurozone QE programme. The primary problem has been in deciding who is to take on the risks, and thus the potential costs, of such a policy. The ECB, after all, is not so much an independent entity as a co-ordinating body for the various national central banks of those countries using the Euro, each of which has its own particular interests and peculiarities.

With the Eurozone mired in stagnation, and with deflation knocking at the door, the heads of the various central banks in Europe – and, in particular, Mario Draghi, the Italian-born President of the ECB – have decided that now is the time to experiment and explore the uncharted waters of QE within an economic zone that shares a currency but, unfortunately, very little else when it comes to economic matters.

The exact details of the Eurozone programme will be announced on Thursday (22nd January), but the green light has at least now been given for some sort of QE to go ahead. It seems that at least €500bn will be created, with the intention that this money will be used to buy up the government bonds (i.e. debts) of various Euro countries. This, in turn, is hoped will reduce the cost of borrowing for the most indebted countries, thus reducing the burden of their debts; at the same time, the goal is to encourage business investment, increase economic activity in general, and fight the threat of deflation.

As the old proverb goes, however, the devil is in the detail. Firstly, the scale of the Eurozone QE programme is fairly small, both relative to size of the Eurozone’s GDP and in terms of the magnitude of the crisis that Europe finds itself in. Second, although an initial figure of at least €500bn has been mooted, there has been no promise to make any Eurozone QE programme an open-ended policy; and, without any guarantee from Draghi and the ECB to do “whatever it takes”, uncertainty will remain about the future and security of the Eurozone.

Importantly, uncertainty still remains about who is to bear the risks of such a programme. The main purpose of any ECB-led QE would be to buy up the government bonds and banking assets of the more economically precarious countries, such as Greece, in order to save their economies. The obvious question, however, is what happens if such a country or bank defaults on its debts? The financial markets are already jittery about such a possibility, particularly with the potential for Syriza to come to power in Greece after upcoming elections this Sunday. In the event of default, any Greek government bonds purchased by the ECB would become worthless and the money would be lost forever. Who – one must ask – will cover such a cost?

As the strongest economy in the Eurozone, the Germans know the answer – it is they would have to pay. The Germans ruling class, therefore, are reluctant to endorse any policy that appears to be hand a blank cheque to their more spendthrift neighbours. Under pressure from Merkel, therefore, it is likely that Draghi will have to accept a compromise, and the ECB itself will not make any QE purchases; instead, the decision of how much QE money to supply and – importantly – of which bonds to buy will be left in the hands of the different national central banks.

In short, the ECB will not be directly involved and there will be no centralisation or sharing of the risks. But in the absence of any shared responsibility, who will want to lend a hand to the crisis-ridden economies of southern Europe? The safe bet will be to buy up German bonds – but Germany can already borrow for nearly nothing. The main benefactors of this variant of QE, therefore, would be the very people who need the least help, whilst those that are on the verge of death would be left out in the cold.

The limits of the nation state

The barriers to any co-ordinated action that have prevented QE in the Eurozone thus far, therefore, clearly still remain. At root, this barrier is that of the nation state, which acts as an enormous straightjacket on the development of the productive forces.

From its inception, the Euro project was doomed. As the Marxists pointed out at the time of its creation, on a capitalist basis, there is no possibility of unifying the economies of a multitude of countries, all pulling in different directions at different speeds, and each with its own national bourgeoisie and its own specific interests.

Such tensions and antagonisms were able to remain hidden in the epoch of credit-fuelled growth that preceded the onset of the world crisis of capitalism in 2008. After this qualitative turning point, however, it became clear that the European project of the EU and the Euro were (and still are) primarily driven by the needs and interests of the strongest capitalists. Initially, before the crisis, this meant the French and German bourgeoisie; but, with the German ruling class attacking wages - and thus improving the competitiveness of German capitalism in the early 2000’s - and with France increasingly becoming the sick-man of Europe, it is obvious that it is Berlin that calls all the shots.

Before the crisis, all was for the best in the best of all possible worlds. The peripheral economies of the PIIGS – Portugal, Ireland, Italy, Greece, and Spain – could borrow cheaply to fund household consumption and public spending programmes, whilst German capitalists made very handsome profits by exporting to these very same countries.

The crisis, however, exposed the unsustainable nature of the growth in the PIIGS, and highlighted the weakness of the economies of these countries – a weakness that could only be overcome whilst locked within the monetary union of the Euro by a process of “internal devaluation”: that is, through attacks on wages, conditions, and public services. This is the price that the Germans now demand of the southern neighbours in return for continued membership of the Euro club.

A band of thieves without any loot

richpoorAll the political leaders agree that something must be done to save the Euro. But when anyone points out the costs, suddenly these leaders are nowhere to be seen: the bourgeois crowd scatters and it is the working class across Europe who is left holding the bill. Like a band of thieves, the national bourgeois representatives are willing to co-operate when there is plenty to go around; but when the takings are scarce, they are soon at each other’s throats.

The more astute and serious mouthpieces of the bourgeoisie hold their heads in despair and call for more “co-ordinated” and “concerted” efforts to save the Eurozone; but how can there be co-operation between such a gang of pirates, each out to save their own skins?

The crisis in Europe has increasingly exposed the national contradictions at the heart of the European project. From the beginning, the German ruling class have demanded all the benefits of the EU and the Euro, without accepting any of the costs. But the contradiction remains and continues to intensify – the contradiction between what is necessary for the survival of the Eurozone and what the German ruling class are willing to pay for this survival.

This latest episode has only served to highlight the tension between Merkel and Berlin, on the one hand, who refuse to bear any risks or responsibility, and Draghi, on the other hand, who is attempting in vain, on behalf of the European bourgeoisie as a whole, to stop the whole ship from sinking.

At the end of the day, however, he who holds the purse strings makes the rules and he who pays the piper calls the tune. Hence Merkel and the Bundesbank have managed to set the terms of the debate throughout the Euro crisis, protecting the interests of German capitalism, often to the detriment of the Eurozone as a whole. In doing so, the German ruling class are more and more revealing the limits of the monetary union and exposing the real nature of the European project as a project for the economic domination of Europe by German capitalism.

Now the Germans demand that they are not forced to take on the risk of any European QE programme. As Robert Peston, the BBC economics editor, comments:

“[S]uch a hybrid approach [of a QE programme without any shared risks] would also be yet another spectacular manifestation of German refusal to help out its ailing neighbours. That would leave investors profoundly unimpressed about the ability of the euro's members to properly pull together to sort themselves out. Their wariness about investing in the Eurozone might be reinforced - thus leaving the Eurozone and its assets even less loved by the world's big money people.”

No compromises from Berlin

At the same time, the frugal and austere Germans are unwilling to make any compromises that let their fiscally and financially frivolous southern neighbours off the hook. Merkel, therefore, demands that QE – and every other measure aimed at averting the Euro crisis – comes with strings attached: in particular, that there is no let-up on austerity and “structural reforms” – i.e. cuts to public spending and attacks on the working class – for Greece, Spain, Italy, and even France.

“[F]or most Germans,” the Financial Times (19th January 2015) asserts, “QE is not the answer to the economic weakness of the Eurozone’s more vulnerable members, with some believing it is a threat to the common currency’s financial stability…Moreover, many Germans say monetary easing will postpone painful spending and borrowing cuts by giving weak states more financial wiggle room.”

Merkel is, however, correct: on a capitalist basis there is no way out for the weaker economies of Europe other than through continued austerity to “restore competitiveness”. QE cannot – and will not – be the magical panacea that some politicians and economists might hope for. As Robert Peston notes:

“QE is no more than a drip for a patient on life support. It is not the cure for the region's basic ailments.”

“…the importance of QE should not be overstated. It is a palliative for a Eurozone economy in which growth-crushing deflation is a clear and present danger. But unless Eurozone governments seize the moment to fix their finances and improve the competitiveness of their private sectors, the region will remain economically anaemic.”

Even such austerity and “structural reforms”, however, are riddled with contradictions. On the one hand, in demanding cuts of the peripheral European countries, Merkel is cutting away at the very market that German capitalism requires for its exports. For years, German capitalism was able to overcome the overproduction within its own borders by creating a market for German commodities in the rest of Europe, who bought up these commodities with money lent at low interest rates by German banks.

Now, all these forces that drove forwards German growth in the past have turned into their opposite and are dragging the Germany economy downwards. Alongside the impact of the Ukrainian crisis and the tensions with Russia, it is the lack of demand as a result of austerity in southern Europe that has helped pull Germany to the verge of recession.

On the other hand, “competitiveness” is clearly relative. One country might carry out “structural reforms” in order to strengthen its national capitalism in comparison to another; but as long as there is international competition, there will always be winners and losers, and the overall result will just be a beggar-thy-neighbour race to the bottom in which the main losers are the worldwide working class.

No way out under capitalism

euro-collapse-topIn the final analysis, the problems of the Eurozone are only a particular manifestation of a global problem: a global crisis of capitalism, rooted in the contradiction of overproduction – that is, of enormous levels of “excess capacity” on a world scale. This is the reason for the predictions of “secular stagnation” now being made by the more far-sighted apologists of capitalism. To be sure, the restrictions imposed by monetary union have exacerbated the crisis in Europe, heightened national antagonisms, and bound the hands of the political leaders more tightly than elsewhere; the fundamental point remains, however: the Euro crisis is a crisis of capitalism.

It is not a matter of QE or structural reforms; of being inside the Euro or outside of it; or of making a concerted and co-ordinated effort: as long as the people of Europe are dominated by the dictatorship of capital, there can be no hope of recovery in the economy or respite from austerity.

Everywhere one looks, the world economy continues to lurch from one crisis to another. Volatility and instability are implicit within the situation. Even Switzerland – once seen as a peaceful island of economic security, serenity, and stability within the otherwise turbulent economic conditions of European capitalism – has now been plunged into crisis. The Swiss National Bank (SNB) had been pegging the Swiss franc to the Euro, buying up Euros in order to maintain the devalued franc and artificially improve the competitiveness of Swiss industry. Now, unable to hold the line, the SNB has had to admit defeat: the currency has been unpegged and has soared relative to the Euro, sending ripples across the world economy. Total losses – the overall size of which is still unclear – are likely to be in the billions.

The main impact, however, has been to add the weight of further uncertainty upon a situation that is already extremely fragile. The power of central banks in this period of national tensions has been demonstrated to be questionable at best, and there are concerns over possibile asset price bubbles due to the intervention of central banks in the market through the various QE programmes that have been undertaken. All of this goes to show that capitalism is an inherently anarchic and chaotic system that can neither be regulated nor controlled. Only a democratic plan of production can bring the immense global forces of production under the rational control of society.

At the same time, uncertainty within Europe now is not only economic, but also political. After years of enduring austerity, the people of Greece are now on the verge of electing Syriza into government. In Spain, the rapid rise of Podemos reflects a similar move of the struggle onto the political plane, as workers and youth seek a way out of the crisis. The rise of such “untested” and “unreliable” parties strikes fear into hearts of the bourgeoisie. More correctly, it is the masses who stand behind these parties, pushing them forwards and demanding an alternative to austerity, that the ruling class fears most of all, for they do not know how the Syriza or Podemos leaders will respond under this enormous pressure and weight of expectation.

One thing is for certain though: all of the lessons from the past seven years demonstrate that there is no way out of the crisis on a capitalist basis. Only a bold socialist programme that challenges the hand of capital can offer a future to the masses in Greece, Spain, and across the whole of Europe. This is vital truth that must be plainly stated – the only alternatives facing the people of Europe are this: socialism or barbarism.